Mobile Payments | The HBS Blog | Business Strategies

By Gregg Schoenberg Tuesday, April 16, 2013

Square, the upstart mobile payments company headed by Twitter co-founder Jack Dorsey, was in the headlines again recently when Starbucks announced it would use the company’s technology to process all of its debit and credit card payments, and that it was investing $25 million in its new business partner. While this particular bit of news may not have a big effect on most entrepreneurs, other than giving them a new way to pay for their daily caffeine fix, the world of mobile payments is, in fact, transforming the way many businesses—from the tiniest start-up to the world’s largest coffee retailer—accept money from their customers.

In order to accept credit cards back in the old days of the mid-2000s, small businesses had to apply for a merchant account from a large bank, submit to a credit check, and wait weeks to have their application processed. For those lucky enough to get approved, it was a costly proposition. You had to buy hardware that could cost close to $1,000, and there were transaction fees of up to $25 a month, even if the business didn’t process any transactions. Once the business started accepting credit cards, the fees were not only expensive—as high as five percent—but they were multi-layered and opaque, if not downright misleading. On top of all this, the business owner was left with a clunky system that took up valuable space and relied on paper receipts. Needless to say, this wasn’t very appealing to the thousands of entrepreneurial enterprises that operate on tight budgets.

Square changed all of that when it came along in 2009; anyone can download the Square app for free and start accepting payments right away, and the fees charged by Square could not be more straightforward: 2.75 percent per transaction, period. And its elegant design, the tiny 2.5-centimeter namesake square, plugs into a smartphone or tablet and allows merchants to instantaneously e-mail receipts to customers without any additional hardware.

As you would expect, Square’s success has spawned a host of competing products from some of the giants of the tech industry. Now battling it out in the mobile payments space are Google, with its Google Wallet service; Intuit, with its GoPayment offering; and PayPal, with its triangular take on Square called PayPal Here.  As the people increasingly move away from cash transactions, all of these services attempt to make it simple and cost-effective for entrepreneurs to accept credit and debit cards. They are all pushing into the next frontier of the mobile payments world by offering customers the ability to pay for their purchases with their smart phones. There are some differences in the fee structures, as well as the software, so be sure to shop around and see which works best for your business.

No matter how big or small your business is, and no matter if you’re a startup just beginning to accept card payments or an established firm looking to cut your monthly credit card-processing bill, it makes sense for you to get to know the new mobile payments landscape.

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